Thomas Money Service Inc Scenario

In: Business and Management

Submitted By psherry75
Words 604
Pages 3
Managerial Analysis
Sherry Perry
October 28, 2013
Norberto Torres

Managerial Analysis
Ideal management is considering Activity-based Costing (ABC) to absorb its increasing Research & Development (R&D) costs that have been spiraling uncontrollably. Ideal R&D Department has only provided in-house services to its manufacturing departments, but Ideal management is considering outside R&D support to other manufacturing firms that have requested support to help with the R&D costs. To accomplish this goal, with an activity based costing (ABC) system, which is a two-step process, first we need to identify the activity cost pools. This is an essential task to identify the tasks performed to produce a product or perform a service. All activities must be documented. In the case of Ideal, for just the R&D Department, four cost pools have been identified; they are Market analysis, Product design, Product development and Prototype testing. The next task is to determine the annual overhead costs for each cost pool. The annual costs for each pool are as follows; Market analysis: $1,050,000, Product design: $2,350,000, Product Development: $3,600,000, and Prototype testing: $1,400,000. The next step is identifying cost drivers within each cost pool. One cost driver has been identified for each cost pool. Once the amount for each driver is calculated, the annual overhead cost for each cost pool is divided by the cost driver for that cost pool to determine the Activity-Based Overhead Rates for each cost pool. Now, that the rates are established, we now know what to charge for in-house manufacturing department for R&D services or outside services requested by other companies. Thus, for one hour of analysis cost driver under the Market analysis cost pool would be $70.00. For design development the charge for 1 design would be $94.00, For…...

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